Credit Cards: Selecting the Best

by Kevin Brasler

Last updated in August 2014

Hundreds of credit-card options are available to most consumers. On one hand, the hypercompetitiveness of the market spurs rebate and rewards programs that provide customers with something in return for their spending. On the other hand, too many choices can lead to confusion and poor credit-card choices—and for some consumers, programs that reward spending encourage way too much spending. In short, you have something to gain by playing your cards wisely—and much to lose by making unwise choices.

Before applying for any card, please consider this general advice:

Don’t use a credit card if it entices you to spend more than you can afford or make unwise purchases.

Using a credit card to borrow money is usually a bad deal—using savings or obtaining other types of credit, such as home-equity credit lines, are usually lower-cost options.

If you have a lot of revolving debt, create a budget and financial plan focused on paying it off.

Make sure any card you consider offers a grace period for paying your balance before it charges interest. Almost all credit cards do offer grace periods, but it pays to double-check.

Carefully review credit-card offers. Many credit cards have high annual fees, high interest rates, high balance transfer fees, useless rebate/rewards programs—or all of the above.

Now that you’ve been duly nagged, it’s time to shop. First, check your credit score. If you have a low score, you won’t be eligible for some types of rewards cards; for example, most cards affiliated with airlines approve only applicants with good or excellent credit scores. With most credit cards, customers with the best credit scores pay lower rates than customers with low scores.

At AnnualCreditReport.com, you can obtain one free credit report per year from each of the three major credit-reporting agencies: Equifax, Experian, and TransUnion. Check your credit report once a year to make sure no one has stolen your identity. Those reports won’t include your credit score; to obtain it, use the free services of CreditKarma.com or CreditSesame.com; avoid signing up for fee-based credit-monitoring services.

With your credit score in hand, the next step is to figure out which type of card is best for you—

If you have credit-card debt, or often have unpaid balances at the end of your billing cycles, get a card that offers the lowest interest rate and charges no annual fee. Low-interest cards seldom offer rebate or rewards programs, which typically come with cards that carry considerably higher interest rates and annual fees. You won’t benefit from a card that offers a one-percent rebate on purchases if it charges 10 percentage points more interest per year on balances you carry than a low-interest, no-rewards card charges.

If you currently carry large credit-card debt, consider a card that lets you roll that debt onto it with no interest for a long period of time (typically 12 to 18 months). But keep your eye out for any balance transfer fees; most cards levy a three-percent fee for the privilege of transferring your debt to them.

If you always pay off your credit-card balances each month, focus on rewards credit cards, which give you something back for using them. There are three main types of programs:

Cards affiliated with airline frequent flyer programs

Cards that offer points that can be redeemed for travel, products and services, or even charitable donations

Cards that offer cash rebates

The key to picking the right rewards card is to calculate the value of the reward per-dollar-spent multiplied by your typical spending during the year and weighed against any annual fee. For example, if you charge $5,000 per year, it makes no sense to pay $100 per year for a credit card that provides what amounts to a one-percent rebate; you’d pay a $100 fee for a $50 reward.

Although calculating the value of rewards should be straightforward, with some cards it can be a challenge. Some cards offer higher reward amounts for things like gas purchases, and some tier awards so that customers whose spending exceeds a certain amount receive higher rebate percentages. For cards affiliated with airlines, which usually offer one frequent flyer mile for every dollar spent, it can be very hard to determine the cash value of the miles. Too many factors are at play. If you redeem for a short, cheap route, the value of each mile can be less than a penny; if you redeem for a first-class ticket or upgrade on an international flight and don’t have to give up too many miles, the value can be five cents per mile. Frequent-flyer-mile values further shrink if you have to pay booking fees of $100 for “free” tickets, or if a competing airline offers the same itinerary for a low fare compared to the pile of miles you must surrender for it. But keeping these factors in mind, a reasonable rule of thumb is to assume each mile is worth about 15 cents, or a 1.5 percent rebate.

Further clouding the credit-card arithmetic are bonuses many cards offer new customers. Many cards offer 20,000 or more points or miles to sign up and use their cards. Pretty sure you’ve settled on a card affiliated with Delta’s SkyMiles? Be sure it’s the right one: American Express offers four different SkyMiles cards, each with different bonus offers, annual fees, mileage-accrual rates, and points toward attaining preferred status with the airline.

For the most part, it’s easier to figure out the value of rewards for cards that provide cash-back rebates or rewards points per-dollar-spent so you can use these points to buy stuff. Check whether two-points-per-dollar-spent means you get two percent toward rewards purchases.

Consider the type of rewards you want and where you can use them. It does no good to spend your hard-won rewards points at a store that’s 20 percent more expensive than its competition. If you don’t travel much, a pile of frequent flyer miles won’t do much for you. On the other hand, with some airline cards, you get more than frequent flyer miles or points; for example, you may get free checked bags or better seat-assignment options.

One last wrinkle: Many cards put a time limit on miles or rewards you earn. With these cards, if you don’t redeem your rewards before their expiration date, you lose ’em.

Okay, we get it: The vast number of factors to consider and a ton of cards to compare make shopping for the best card even more complicated than most financial decisions. Fortunately, several websites that track and evaluate credit-card offers can help narrow your choices. Our favorite comparison tool is offered by CreditKarma.com: Once you enter information about your credit score and detailed monthly spending habits, it spits out lists of cards that are likely to approve your application, sorted by your personal priorities. You can compare each card based on interest rate, intro interest rate for purchases, intro interest rate for balance transfers, and its estimate of the average rewards rate, including a calculation of the cash value of rewards you’d get over one, two, or three years by switching to the card.

CreditKarma, Consumer Reports, and similar sites, such as Bankrate and CreditCards.com, don’t list every credit card that hits the market (a big problem is that none of these sites compare cards offered via credit unions). Nonetheless, these sites do provide enough credit cards for comparison so that most consumers will be able to make a good choice.

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